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The second‐round effects of carbon taxes on power project finance

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  • Paul Simshauser
  • Tim Nelson

Abstract

Purpose - The most problematic area of any carbon policy debate is the treatment of incumbent CO2 intensive coal‐fired electricity generators. Policy applied to the electricity sector is rarely well guided by macroeconomic theory and modeling alone, especially in the case of carbon where the impacts are concentrated, involve a small number of firms and an essential service. The purpose of this paper is to examine the consequences of poor climate change policy development on the efficiency of capital markets within the Australian electricity sector. Design/methodology/approach - The authors conducted a survey of Australian project finance professionals to determine the risk profiles to be applied to the electricity sector, in the event a poorly‐designed climate change policy is adopted. Findings - The Australian case study finds that if zero compensation results in the financial distress of project financed coal generators, finance costs for all plant rises, including new gas and renewables, leading to unnecessary increases in electricity prices. Accordingly, an unambiguous case for providing structural adjustment assistance to coal generators exists on the grounds of economic efficiency. Originality/value - Accordingly, the paper shows that an unambiguous case for providing structural adjustment assistance to coal generators exists, on the grounds of economic efficiency.

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  • Paul Simshauser & Tim Nelson, 2012. "The second‐round effects of carbon taxes on power project finance," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 4(2), pages 104-127, May.
    • Handle: RePEc:eme:jfeppp:v:4:y:2012:i:2:p:104-127
    DOI: 10.1108/17576381211228970
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    References listed on IDEAS

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    1. Paul Simshauser & Thao Doan, 2009. "Emissions Trading, Wealth Transfers and the Wounded Bull Scenario in Power Generation," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 42(1), pages 64-83, March.
    2. Paul Simshauser, 2011. "The Hidden Costs of Wind Generation in a Thermal Power System: What Cost?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 44(3), pages 269-292, September.
    3. Garnaut,Ross, 2011. "The Garnaut Review 2011," Cambridge Books, Cambridge University Press, number 9781107691681.
    4. Simshauser, Paul, 2010. "Resource Adequacy, Capital Adequacy and Investment Uncertainty in the Australian Power Market," The Electricity Journal, Elsevier, vol. 23(1), pages 67-84, January.
    5. Simshauser, Paul, 2008. "On Emission Permit Auction vs. Allocation and the Structural Adjustment of Incumbent Power Generators in Australia," The Electricity Journal, Elsevier, vol. 21(10), pages 30-41, December.
    6. Simshauser, Paul, 2009. "On Emissions Trading, Toxic Debt and the Australian Power Market," The Electricity Journal, Elsevier, vol. 22(2), pages 9-29, March.
    7. Bushnell, James, 2004. "California's electricity crisis: a market apart?," Energy Policy, Elsevier, vol. 32(9), pages 1045-1052, June.
    8. Paul Simshauser & Phillip Wild, 2009. "The Western Australian Power Dilemma," Australian Economic Papers, Wiley Blackwell, vol. 48(4), pages 342-369, December.
    9. Simshauser, Paul & Nelson, Tim & Doan, Thao, 0. "The Boomerang Paradox, Part I: How a Nation's Wealth Is Creating Fuel Poverty," The Electricity Journal, Elsevier, vol. 24(1), pages 72-91, January.
    10. Zephyr, 2010. "The city," City, Taylor & Francis Journals, vol. 14(1-2), pages 154-155, February.
    11. Johnson, Omotunde E. G., 1994. "Managing adjustment costs, political authority, and the implementation of adjustment programs, with special reference to African countries," World Development, Elsevier, vol. 22(3), pages 399-411, March.
    12. E. C. Pasour, 1973. "Economic Growth and Agriculture: An Evaluation of the Compensation Principle," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 55(4_Part_1), pages 611-616.
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    Cited by:

    1. Gohdes, Nicholas & Simshauser, Paul & Wilson, Clevo, 2022. "Renewable entry costs, project finance and the role of revenue quality in Australia's National Electricity Market," Energy Economics, Elsevier, vol. 114(C).
    2. Nelson, James & Simshauser, Paul, 2013. "Is the Merchant Power Producer a broken model?☆☆The views expressed in this paper are those of the authors and any errors or omissions remain the responsibility of the authors," Energy Policy, Elsevier, vol. 53(C), pages 298-310.
    3. Gohdes, N. & Simshauser, P., 2022. "Renewable entry costs, project finance and the role of revenue quality in Australia’s National Electricity Market," Cambridge Working Papers in Economics 2206, Faculty of Economics, University of Cambridge.
    4. Nelson, Tim & Reid, Cameron & McNeill, Judith, 2015. "Energy-only markets and renewable energy targets: Complementary policy or policy collision?," Economic Analysis and Policy, Elsevier, vol. 46(C), pages 25-42.
    5. Simshauser, P., 2020. "Merchant utilities and boundaries of the firm: vertical integration in energy-only markets," Cambridge Working Papers in Economics 2039, Faculty of Economics, University of Cambridge.

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